actor Endowments and the Heckscher-Ohlin theory take this one step further by analysing the effect that international trade has on the earnings of factors of production in the two trading nations (Salvatore,1999).The Heckscher-Ohlin theory presents the issue that international and interregional differences in production costs occur because of the differences in the supply of production factors (Ball, McCulloch, 1999). Those goods that require a large amount of the abundant, thus less costly factor will have lower production costs, enabling them to be sold for less in international markets (Salvatore, 1995).Countries such as Australia with relatively large amounts of land do export land intensive products (eg, grain and cattle) whereas a country like China would export labor intensive products.There are exceptions to the Heckscher-Ohlin theory which are to do with the assumptions that Ohlin drew. One assumption was that the prices of the factor depended only on the factor endowment. This is however untrue as factor prices are not set in a perfect market. There are such factors to consider such as legislated minimum wages and benefits force the cost of labor to rise to a point greater than the value of the product than many workers can produce (Ball, McCulloch, 1999).Many economists attempted to disprove the Heckscher-Ohlin theory. The most notable effort was by a man named Wassily Leontief. His paradox was self named (Leontief Paradox) and disputed the theory as a predictor of the direction of trade. This paradox failed to empirically validate the country based Heckschler-Ohlin theory (Mankiw, 1997).Country Similarity TheoryCountry similarity theory was developed by a Swedish economist named Steffan Linder (Mahoney, Trig, Griffin, Pustay, 1998). However before the country similarity theory can be analysed it is essential to understand the concept of intra industry trade. Intra industry trade is trade between two countries of goods produ...
